How to hunt for profits in the stock market

Today’s new traders aren’t paying dealing fees with Freetrade. But there are plenty of other costs to overcome.

There’s stamp duty, spreads on shares, platform fees, and if you do well even taxes (though these can often be avoided – see point #2 below).

More importantly, most people can’t pick stocks to beat the market.

They have no ‘edge’, in the lingo.

That includes most fund managers, incidentally. Most of their funds lag the market, too. (It’s all because active investing is a zero sum game).

A potentially costly business

That’s not to say you can’t buy a bunch of shares that will go up.

In a market that’s been flying higher like we’ve seen for the past two months, it’s easy.

But most of the time you would have done even better just to put your money in an index tracker fund and gone back to those Udemy cookery lessons.

Most things go up in a bull market.

12 tips to help you make money investing in shares

I’m not going to labour the point about passive investing in index funds today.

You opened your new trading account for excitement, not something that’s just as dull to do as it sounds – even if it is more profitable.

I’ll mention it again before we’re done (Monevator believes index funds are best for nearly everyone) but let’s assume you want to invest in individual shares to make money.

You want the glamour of being a high-rollin’ ball-bustin’ share trader!

Sitting on your sofa in your Gymshark shorts on your iPhone!

Here’s a dozen pointers from someone who has been striving to beat the market for nearly 20 years.

My tips might help.

A bit.

1. Keep costs low and trade less frequently

A commission-free broker like Freetrade is a great start, but remember UK investors also pay 0.5% stamp duty when buying into most larger UK shares. There’s a bid/offer spread on shares, too – same principle as when you change currency at the airport – and if you buy overseas stocks there will be a foreign exchange cost. Churning your portfolio every few days quickly multiplies these costs. With most platforms (though not entry-level Freetrade) there are annual charges, too. Check out our comparison table to find the best platform for you.

2. Use tax shelters – in the UK that’s ISAs and SIPPs

Even Freetrade charges £36 a year if you want to do your trading in an Individual Savings Account (ISA) while other platforms charge you to do so in a Self-Invested Personal Pension (SIPP). Despite the nailed-on expenses, you should bite their arm off and open them. In theory small-time traders can muck about without worrying about taxes on capital gains and dividends, but as your pot grows, taxes loom. Use an ISA and you can forget all about taxes, while a SIPP defers any pain until you retire. (More on tax-efficient investing and ISAs vs SIPPs).

3. Don’t blindly buy strangers’ share tips

It’s fine to read the better blogs, financial Twitter, and forums to learn about investing. You can learn a lot from smart investors who share how they think. But be wary of people touting their specific trade ideas – unless at least halfway vetted and presented in some depth, on a venue like Seeking Alpha or The Motley Fool – and run away from anyone urging you to get in NOW because it’s “about to go ballistic”. They’ll usually be clueless, cheats, scammers, or some exotic combination. Even if they’re not – is that how you’ll invest for the rest of your life? Following strangers ramping stocks online? Does that seem a likely route to wealth to you?

4. At our level, technical analysis doesn’t work. It’s horoscopes for grown-ups…

Most of these Internet hucksters will urge you to look at charts. They will talk about reversals, channels, double-tops, breakouts, and sacrifice chickens to the moon. The quickest and easiest summary of what you should do is ignore it all. It’s true that some ultra-sophisticated hedge funds find trading signals in price information (read The Man Who Solved The Market) but Barry on his iPad isn’t one of then.

5. …although you should favour shares where prices are rising over those falling

The one bit of price action it’s worth paying attention to is momentum. You’ll probably get better results if you buy shares the market seems increasingly keen on (a chart where the price is going up over time) versus one it seems to dislike (the price is sliding). The market isn’t stupid. It usually figures out when a company has something good going on. Also, momentum is a factor that can give a slight edge to a portfolio. (I’m hugely oversimplifying. That’s what happens if you don’t want to read a 480-page book…)

6. Don’t get carried away with value investing  ‘fundamentals’, either

Most people eventually realize that trying to guess where shares will go by looking at their price charts isn’t making them any money. They may then dive in the other direction to study the metrics of a company/share. Things like the price-to-earnings ratio (a measure of how much you pay for profits), dividend yield (the cash you get back every year, if you’re lucky), or the book value (what, in theory, the company is worth, if things like Coca-Cola’s brand name weren’t in reality worth billions). That latter point gives you a clue as to the can of worms you’re opening. Yes, learning to understand these fundamentals is vital, eventually, and far better than watching random chart squiggles, but it’s a huge undertaking that’s prone to gross simplification. You only need to utter “this share is a bargain because the P/E is 3 and it yields 15%” once before a company goes bust to realize the numbers don’t tell you everything.

7. Instead, think about shares as businesses

This one might seem blindingly obvious, but even experienced investors often forget stocks are not an abstract mathematical artifact – they are mini-ownership stakes in businesses. When you buy shares you buy a part of a company that faces opportunities and struggles, and that’s striving to grow with the economy. This is what enables stock markets to go up over time (rather than being a futile piece-of-paper-shuffling racket as some believe). Analyze your shares by understanding them as companies. I believe you’ll eventually see much better results. This also connects your investing to the everyday world around you, which is a far more interesting way to live!

8. Be wary of ‘story stocks’

One danger with looking at shares as business propositions though is that you can be seduced by a good story. Every stock picker has been tempted by a tiny miner just months away from striking gold, a biotech about to cure cancer, or a manufacturer with a prototype engine that runs on old Amazon packaging. Also known as ‘blue sky’ stocks (because there’s often nothing to them) these are speculative ventures that should get – at most – a tiny percentage of your money and time.

9. Invest for the long-term: run your winners, and cut losers

At first, you think it’s all about buying low and selling high. That it’s never wrong to take a profit. That falls in markets are due to ‘profit taking’. And all of this makes sense if you’re a trader who lives or dies on your rules or system. But as I said, most people shouldn’t be traders. Be an investor. And when you invest in companies for the long-term – think years – the best can multiply in time many times over. I put 1% of my portfolio in Amazon a few years ago, and it’s gone up ten-fold. That kind of growth makes up for a multitude of small losses, but it’s too easy to sell up along the way. Remember, the most you can lose on a stock (assuming you avoid margin/leverage) is as much as you invested, but your gains are theoretically unlimited. One of the most successful stock pickers of all-time never sold anything.

10. Realise the stock market does not move in step with the economy

Another thing some people never understand. The market is not giving you a running tally on the economic headlines. There is a strong connection, certainly, between the real-world economy and the market. As I said the market consists of companies operating in the economy. But because investors can bid up or crash the prices of those companies for myriad reasons – hope, fear, greed, miscalculation, laziness – the two often seem out of kilter. In early 2020 markets started falling before many of us had even heard of the virus. They then rose as tens of millions lost their jobs. This seems bizarre until you understand markets look forward into an uncertain future. People are constantly trying to predict that future when they select what firms they want to own (or sell) and what price to pay, based on how they see things going.

11. Benchmark your performance (possibly)

If you’re going to be an active investor – as opposed to a passive investor using index funds – then you should probably track your returns accurately, and compare (benchmark) your performance against the market. The best way to do this is to unitize your portfolio. This enables you to properly compare your returns with any active or index fund. If after a few years you see you’re deluding yourself that you have edge, you can stop the bleeding! The reason I say ‘possibly’ is that tracking returns can encourage bad investing behaviour. You can get too short-term focused, trade more often, and simply get stressed. This is something I struggle with. Investing is a passion for me, and I sometimes think I should go back to not tracking my returns because I suspect I did better in those laid back days. But, of course, I don’t know that I did, because I didn’t track then…

12. Make a start with a passive index investment, on the side

An easy compromise is to split your investment money in two, and to put half into an index fund and half into your stock picks. You can do this even on a share-trading platform like Freetrade or Interactive Investor by buying a world index-tracking exchange-traded fund (ETF). Assuming you don’t add new money to your portfolio you’ll get a sense of how well you’re doing compared to your benchmark, that ETF. (If you do add new money, invest it equally between your ETF and your other shares to keep the comparison straight.) If after a couple of years you’re not adding value compared to the ETF, then sell your individual shares, invest in a proper passive ETF portfolio, and get yourself a new hobby. You’ll almost certainly end up richer as a result.

Put these on your reading list

What if you find you’re one of the rare few with the strange combination of personality traits required to make it as a market-beating stock picker?

Or if you really want to maximize your chances, at least?

You need to stop reading FinTwit and start reading books.

I have read over 100 books on investing, easily. Most of them had something to teach.

Here’s a rather eclectic list to get you started:

  • The Art of Execution – One of the very few books about how to actually go about building – and pruning – a portfolio for profit.
  • You Can Be A Stock Market Genius – Stop looking in the obvious places for your investments. Hunt out hidden advantages. The examples are dated, but the mindset is timeless.
  • One Up On Wall Street – Again, dated examples, but you won’t find a better book on thinking like a business owner even as a spare bedroom investor.

If you want to try share trading, do so for free with Freetrade. Sign up via that link and we both get a free share. You’re already winning! The Interactive Investor and Amazon links are also affiliate links. This is a marketing cost for them, and doesn’t affect what you pay.

Leave a Reply

Your email address will not be published. Required fields are marked *


This site uses Akismet to reduce spam. Learn how your comment data is processed.